Respite for banking sector after SVB purchase

Susannah Streeter, head of money and markets, Hargreaves Lansdown “With Silicon Valley Bank’s deposits and loans now housed in longer term accommodation in the US, a calm of sorts has descended on the banking sector but hopes that this move will see significant stability return may be short-lived. For now, though, there is relief that First Citizen Bank, one of America’s largest family-controlled banks, has come to the rescue by snapping up $72bn of SVB’s assets at a discount of $16.5bn from the Federal Deposit Insurance Corporation.

The development has brought some respite to the beleaguered banking sector in early trade, with Deutsche Bank, hit by such turmoil on Friday, surging by more than 6%. In London, Barclays, Standard Chartered, HSBC and Lloyds all moved higher as a bit more confidence returned.

First Citizen sees opportunity in SVB’s venture capital business and is expected to focus on expansion in California. But the FDIC will still retain around about $90bn of SVB’s assets. Already the estimated hit to the FDIC’s deposit insurance fund from SVB’s failure is about $20bn. Shunting parts of the failed bank off to a new owner to may give the regulator more capacity to deal with problems still threatening to pop up elsewhere, particularly with US regional banks.

The big worry is that they are sitting on big piles of unrealised losses, not just in their bond portfolios, but on other assets which have been battered by the storm of high interest rates. It’s feared that the commercial real estate sector could be the next weakest link as debt matures over the next few years and will need to be refinanced in a market where rates have soared, while valuations have fallen, and there is a lot less money sloshing around.

It’s little wonder, the banking scare is also firmly in the sights of the International Monetary Fund, which has warned of high uncertainty and the need for vigilance given that the risks to financial instability have increased.”